Welcome to The Business Academy.
These 8 people control over $50 Billion in wealth. What do they all have in common?
Steve Wynn ($3bn)
Carl Icahn ($17bn)
Nelson Peltz ($1.8bn)
Leon Black ($9bn)
Henry Kravis ($9bn)
Ron Pereleman ($3bn)
Ted Forstmann ($1.6bn)
Irwin Jacobs ($1.2bn)
Craig McCaw ($2bn)
8 billionaires.
Across different industries including hospitality, telecom, industrials, energy, and more.
All of their career were catapulted into the stratosphere by one person:
Michael Milken at the investment banking firm Drexel.
How did he do it?
Milken invented a new class of financing called Junk Bonds. This allowed him to build the biggest fundraising machine in history.
Michael had a unique insight early in his career. He learned that many great businesses have poor credit ratings. So poor that they are not considered "investment grade". But some of these are wonderful companies. They're not going anywhere. But because they have poor investment ratings, they are willing to give you great returns on debt (bonds).
Most premier investment banking firms like Morgan Stanley did not want to serve these "mid-size" businesses with poor credit ratings. Because they worried they would lose their status of being perceived as a firm that served the "best" companies. In short they didn't want IBM to think less of them.
Here was Milken's opportunity.
Drexel had no reputation. So he had no issue taking small client.
Drexel could make a lot more money with small clients. If IBM needed debt, banks would charge 1% or less to raise the money. If a mid-size business needed debt, Milken could charge them 3% in cash fees and 10% in warrants.
By going where others did not, he found a much better business model for his firm.
And finally, Milken learned to control all sides of the deal. Which leads me to his second key learning:
Never let the deal go into default.
Milken learned that high debt payments may suffocate a business. But letting them declare bankruptcy would hurt his investors. Which meant he needed to be in the driver's seat when things went bad.
So instead his team functioned as the pseudo-bankruptcy judge.
If a company couldn't pay, Drexel took on itself to negotiate terms where investors converted to equity, or accepted lower payments which allowed the company to survive. And investors could get a bigger piece of the pie if the company did well. It was critical for his machine that he not lose investor money. He needed them to follow his lead when he called capital in the future.
Drexel's fundraising business boomed under Milken. He grew it from less than $200 million per year to $15 billion per year (75x).
Milken went to jail for two years after being prosecuted by Rudy Guiliani (over 30 years ago). I don’t have enough information to rule either way, but it’s worth noting Guiliani was disbarred years later.
How did Milken make these people's careers?
In short, he raised them money they otherwise would not be able to access.
For example, Milken raised $160 million for Steve Wynn to build his ground-up casino vision in Atlantic City (The Golden Nugget). This became the highest-grossing property in all of AC.
Craig McCaw built a large cellular business that he sold to AT&T for $11 billion. When Craig started building his network most banks were not familiar with cellular technology. Imagine pitching cellular when the rest of the world has landlines. It was a crazy idea. Milken raised $120 million for McCaw to buy MCI, and then $3.5 billion to purchase LIN Broadcasting.
Every person on this list has a similar story. Would they have been successful without Milken? Likely yes. Would they be titans of industry, and effectively celebrities of the business world? No, I don't think so.
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have a great week,
Sieva
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
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